Some perspectives on reform and the RB in the 1980s

A new book came in the post the other day. It is a scholarly look at the long-term relative economic performance of New Zealand and Uruguay, something I wrote about quite recently and a subject I may come back to when I’ve read the book.

But there is an old line, especially applied to newspaper and magazine articles, that when the coverage of something you know about doesn’t ring true, be wary of the rest of the article. And flicking through this new book my eye lit on a strange reference to the Reserve Bank.

In a paragraph on the reform period from the mid-1980s to the early 1990s (“which showed characteristics of a coup”), the author writes

Douglas as well as further members of the Cabinet, the Business Roundtable, and other strategically located institutions represented the exclusive inner circle of the new right. Until at least 1988, they used their large human capacities at the Treasury and the Reserve Bank to suppress alternative views and to limit the choices for MPs to a laissez-faire policy agenda. Just as under Muldoon before, opponents were driven out to other departments and the private sector through informal pressure or became subject to petty harassment [ a footnote at this point adds “even university staff were affected, as controversial articles were less likely to be published in 1990 than in 1930”].

Very little of this rings true to me.

I’m not going to speak much of the Treasury, except to note that (a) Roger Kerr always spoke of how Muldoon respected the traditional boundaries of the public service, allowing Treasury (and people like Kerr) to develop their more market-oriented approach to analysis and advice (even if the Minister himself was not receptive to much of that advice), and (b) that I do know a few very able (and later successful) people who were either turned down from jobs with Treasury in the late 80s, or chose not to apply, because they were not-entirely-sympathetic to the reform process. Plenty of people from the “right” in Treasury left for the private sector during those post-liberalization years – opportunities abounded.

What of the Reserve Bank? I was a manager in the Bank’s Economics Department (then, its main economics and policy wing) from 1987 to 1993. At any one time, there were around six of us in the management group (led by Grant Spencer, and then Arthur Grimes), and above the department were the Governor and two or three Deputy/Assistant Governors. There were a handful of other key people leading other departments (Financial Markets, International, Financial Institutions). I suppose we should be flattered to be described as “large human capacities”, but to read the extract above one might suppose this was some phalanx of right-wing zealotry, demolishing all in our path.

There was a fair amount of turnover at the Bank during these years. It wasn’t mostly people fleeing to the rich rewards of the financial markets – mostly that was the next tier down – but people coming and going from positions with international agencies such as the IMF and World Bank and advisory positions in developing country central banks. I jotted down a list of 24 people who held the various key economic roles in the Reserve Bank over those years, and went looking for the right wing zealots. No doubt some would class Roderick Deane in that category, but he had left the Reserve Bank in 1986. What was left was a very short list. I recall one very able colleague who wrote a nice think piece on free banking, and another who (in the abstract) was keen on open borders. We liked to believe we were keen on rigorous economic analysis – others can judge how well we did. Most probably believed in fewer controls rather than more, and lower inflation rather than the New Zealand track record of the 70s and 80s. Probably all wanted to be part of turning around New Zealand’s disappointing economic performance. But a haven of ideological zealots it was not – and what research we were publishing was mostly quite technocratic (at the time, most of the Bank’s research resource was devoted to building a new macro model, which proved largely useless amid the transitions and data discontinuities) and not much oriented to the overall policy framework at all. Assistant Governor, Peter Nicholl, was said – I never knew if it was true – to have been involved in the Labour Party in his younger days before Labour became market-oriented, and at least two of us canvassed for National in the 1984 election (I blame my colleague..). Largely, we were not-very-ideological technocrats. I wasn’t much involved with recruitment at that time, but I don’t recall any suggestion of ideological tests

In fact, that was somewhat so for the institution as a whole. Don Brash is other name associated with an ideological perspective. Don only joined the Bank in late 1988, but was hardly pursuing very low inflation aggressively – at least from the perspective of the in-house hawks (it did, after all, take more than seven years to get inflation down). Don was also the one who signed up to Mike Moore’s Growth Agreement with the trade union movement during the 1990 election campaign. Don recommended extending the target date from 1992 to 1993, explicitly to help allow room for a fall in the real exchange rate, to assist with rebalancing the economy. And during 1991 Don and his, by then deputy, Peter Nicholl shocked some of younger enthusiasts by easing policy on the argument that “preserving the framework [RB Act] was more important [in the near term] than price stability”. (Some of this material I dealt with here.)

I’m not suggesting that we were without fault, but equally – and contrary to the impression given in the quote above – we were operating in a climate in which everything was contested, and no one was confident that the reforms would endure. It is fine to say that both main parties supported the reforms, but the big divisions were within the two parties not between the leadership of the two (Labour had large left-wing factions which had Jim Anderton as their most prominent figure, and National had Sir Robert Muldoon, Winston Peters – and Bill Birch, then still mostly thought of as the former minister of Think Big). It is no secret, for example, that National’s support for the Reserve Bank Act was the result of an extremely close caucus vote, which Muldoon missed on account of illness. Even when National won the 1990 election, we in the Reserve Bank were not remotely confident that the Richardson wing would be in the ascendant (or for long). For the first year of that government, we (and Treasury) were constantly uneasy that political fortunes would change quickly, and many of the reforms could go as quickly.

I was also a bit surprised by the comment about the universities. I know various academics felt quite embattled, and ignored (and there was some grievance about cuts of government funding for the NZIER eg), but from our perspective in the Reserve Bank we also felt embattled, and were the subject of frequent academic attacks (those were the days, unlike now, when university economics academics were very engaged with policy issues). There had been the several rounds of exchanges between Victoria academics and the Bank and Treasury in 1985, on the analysis in the respective post-election briefings. And when the Reserve Bank legislation was going through Parliament in 1989, the New Zealand academic economics community was pretty united in opposition (there may have been the odd supporter, but they kept very quiet). This was the occasion of one of the more embarrassing lines I wrote in my decades in the public sector: we published an official response I had written to one prominent submission that had noted the absence of local academic support for the legislation: that said, we asserted, more about the quality of New Zealand academic economics than about the merits of the proposal. We felt pretty embattled – even if it didn’t always look that way to outsiders.

There was a lot about the reform period that isn’t particularly attractive, and of course – although I continue to think that most of what was substantively done was in the right direction – it doesn’t help that our relative economic decline continues, albeit at a slower pace. New Zealand political institutions in those days (single chamber, FPP) allowed small groups of politicians to do a lot quickly with few formal checks and balances. Publishing manifestos the week after an election, or simply abandoning high profile campaign promises really shouldn’t be the done thing.

But this simply wasn’t a period of a monolithic reforming class dominating everything. Battles within parties were often vociferous, and opponents often had to be bought off with one concession or other. And Roger Douglas was ousted after only four years, and Ruth Richardson was to last only three years as Minister of Finance. As it happens, most things that were done haven’t been reversed, but that was never inevitable. Things were contested and challenged – perhaps not as well as they could have been (the quality of public debate has long seemed to lack something, on all sides) – and probably nobody emerged unscathed, or totally satisfied.

Perhaps one small marker of the times was a snippet I stumbled on in a scholarly biography of Ken Douglas, picked up at a charity sale over the weekend. Douglas was then the head of the trade union movement, and was not exactly from modernizing centre-left: he was prominent in the Moscow-aligned Socialist Unity Party (openly defending, only a few years previously, the Soviet invasion of Afghanistan and the suppression of the Polish Solidarity movement). The book records that in 1988/89 there was a political furore over the possibility of Douglas being appointed to the Board of the Reserve Bank. It didn’t proceed – the government at the time would not confirm or deny the possible appointment, suggesting there was something to it (and Douglas has subsequently confirmed that he was approached.) Would it have been an inappropriate appointment? Not necessarily, but that the idea was even raised goes against any sense of Roger Douglas, and his Treasury and Reserve Bank “large human capacities” simply ramming through anything they liked.

I really hope the rest of the Uruguay/New Zealand book is better. If so, I’ll let you know.

8 thoughts on “Some perspectives on reform and the RB in the 1980s”

I was at VUW in the early 90s. Although I have fond memories of some of my lecturers, some of the stuff they told us was pretty misleading. For example, that monetary policy was ineffective in a recession, or that Rogernomics had been a disaster. Looking back, it seems like they got the economy to a pretty good position in 1993.

My 7th form year was 1987 and I studied economics. When studying previous exams I realised the entire syllabus had changed! None of my other subjects syllabus had changed -physics was still physics, calculus still calculus….

Really economics should be more honest and acknowledge the subject being taught is political economy and what is being taught reflects the politics of the day.

P.S Michael this personal experience might not be reflected at higher more academic levels. But it is a bugbear from my past I want to get off my chest.

Of course, some of that would have been the technical institutional detail (which genuinely did change, even when the underlying economics didin’t). I recall a case where we discovered a polytech was still teaching about the old control systems, as if they were still in place, years after we’d got rid of eg reserve asset ratios

I think economics is a mix of genuine insight that are impervious to specific regimes, some specific research/analytical techniques (likewise) and a lot of political economy and (if you are lucky) economic history. I recall my honours money class at Vic was mostly a year long debate between me and professor about Thatcherism. Of course, we all learnt a lot in the process, but it was as much about politics and institutions as anything.